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Final Volcker Rule Amended Regulations (Volcker 2.0 – Prop)September 11, 2019 with updates for covered fund provisions July 14, 2020

Final Volcker Rule Amended Regulations (Volcker 2.0 – Prop): Proprietary Trading

www.volckerrule.com September 11, 2019 with updates for covered fund provisions July 14, 2020

© 2020 Davis Polk & Wardwell LLP. All rights reserved. This presentation is not a full analysis of the matters presented and should not be relied upon as legal advice. volckerrule.comVOLCKER RULE 2.0 – PROP

PROPRIETARY TRADING COMPLIANCE REQUIREMENTS OVERVIEW

THE 3 TIERS 20VARIED COMPLIANCE REQUIREMENTS BASED ON TAL 21SIX PILLAR COMPLIANCE PROGRAM 22SUMMARY OF PROPRIETARY TRADING METRICS 23 - 24PERMITTED ACTIVITY-SPECIFIC COMPLIANCE PROGRAM ELEMENTS 25

DAVIS POLK CONTACTS 26

The Volcker Rule was enacted in 2010, as part of the Dodd-Frank Act, as Section 13 of the Bank Holding Company Act of 1956. The original regulations implementing the Volcker Rule were adopted by the five Volcker Rule agencies—the Federal Reserve, FDIC, OCC, SEC and CFTC (Agencies)—in 2013 (2013 Final Rule). The Economic Growth, Regulatory Relief, and Consumer Protection Act amended the Volcker Rule in 2018 to exempt small banking entities that are not significantly engaged in trading activities, and regulations were adopted to implement those amendments in 2019. The Agencies amended the regulations relating primarily to the proprietary trading portion of the Volcker Rule in 2019 (2019 Final Rule).

IS THERE A BANKING ENTITY INVOLVED? 2DOES THE ACTIVITY OR TRANSACTION INVOLVE A PURCHASE OR SALE BY THE

BANKING ENTITY OF ONE OR MORE FINANCIAL INSTRUMENTS? 3IS THE BANKING ENTITY TRADING AS PRINCIPAL FOR A TRADING ACCOUNT? 4 IS AN EXCLUSION FROM PROPRIETARY TRADING AVAILABLE? 5 – 6

MARKET MAKING AND UNDERWRITING 7 – 10 RISK-MITIGATING HEDGING ACTIVITIES 11US GOVERNMENT OBLIGATIONS 12FOREIGN GOVERNMENT OBLIGATIONS 13ON BEHALF OF CUSTOMERS 14REGULATED INSURANCE COMPANIES 15TRADING ACTIVITIES OF FOREIGN BANKING ENTITIES OUTSIDE

THE UNITED STATES 16QUALIFYING FOREIGN EXCLUDED FUNDS 17

Step

1IS THE BANKING ENTITY ENGAGED IN PROPRIETARY TRADING UNDER

THE VOLCKER RULE?

Step

2 IS THE PROPRIETARY TRADING PERMITTED UNDER THE VOLCKER RULE?

Step

3 IS THE ACTIVITY PRECLUDED BY A BACKSTOP PROVISION? 18

The Agencies amended the regulations relating primarily to the covered funds portion of the Volcker Rule in 2020 (2020 Final Rule). The 2020 Final Rule also made certain changes to the proprietary trading portion of the Volcker Rule related to activities of and compliance program obligations on qualifying foreign excluded funds.These Davis Polk flowcharts are designed to assist firms in determining whether they are banking entities subject to the Volcker Rule and its implementing regulations and, if so, to assist those banking entities in identifying permissible and impermissible proprietary trading activities under the Volcker Rule’s implementing regulations.Davis Polk’s covered funds flowcharts are available at www.volckerrule.com

http://www.volckerrule.com







http://www.volckerrule.com/pdf/Davis.Polk.Volcker.Funds.Summary.pdf

http://www.volckerrule.com/pdf/Davis.Polk.Volcker.Funds.Summary.pdf

http://volckerrule.com/

http://volckerrule.com/

Final Volcker Rule Amended Regulations:Proprietary Trading Overview

NO (OR IF ANEXCLUSION

IS AVAILABLE)

ACTIVITY IS NOT PROPRIETARY TRADING AND IS NOT WITHIN THE

SCOPE OF THE VOLCKER RULE

NO

YES

IS A BANKING ENTITY ENGAGED IN PROPRIETARY TRADINGUNDER THE VOLCKER RULE?

Is there a banking entity involved?Does the activity or transaction involve a purchase or sale by the banking

entity of one or more financial instruments?Is the entity trading as principal for a trading account?Is an exclusion from proprietary trading available?

YES (OR IF NO EXCLUSION IS AVAILABLE)

ACTIVITY IS PERMITTED PROPRIETARY TRADING

ACTIVITY IS IMPERMISSIBLE

PROPRIETARY TRADING

Does the activity:Involve or result in a material conflict of interest between the banking

entity and its clients, customers or counterparties?Result in a material exposure by the banking entity to high-risk assets

or trading strategies?Pose a threat to the safety and soundness of the banking entity or U.S.

financial stability?

IS THE ACTIVITY PRECLUDED BY A BACKSTOP PROHIBITION?

IS THE PROPRIETARY TRADING PERMITTED UNDER THE VOLCKER RULE?Market Making and Underwriting

ActivitiesRisk-Mitigating Hedging ActivitiesTrading in US Government

ObligationsTrading in Foreign Government

Obligations

Trading on Behalf of CustomersTrading by a Regulated Insurance

CompanyTrading Activities of Foreign Banking

Entities Outside the United StatesQualifying Foreign Excluded Funds

YES

Tiered compliance program requirements apply for Significant TAL and Moderate TAL Banking Entities.

Significant TAL Banking Entities must also report metrics.

SLIDES 7 TO 17

SLIDES 2 TO 6

SLIDE 18

© 2020 Davis Polk & Wardwell LLP. All rights reserved. This presentation is not a full analysis of the matters presented and should not be relied upon as legal advice. volckerrule.com 1VOLCKER RULE 2.0 – PROP

SLIDES 20 TO 25

Step

1

Step

2

Step

3

NO





Step 1A:Is There a Banking Entity Involved?

An IDI other than an excluded small bank?

A company that is treated as a bank holding company for purposes of Section 8 of the International Banking Act?

A foreign bank with a U.S. branch, agency or U.S. subsidiary commercial lending company

A parent company of such foreign bank

NO

NO

A company (e.g., a bank holding company) that controls an IDI (other than an excluded small bank or non-depository trust company)?

NO

An affiliate or subsidiary, as defined in the Bank Holding Company Act, of any of the above (other than an excluded small bank)?

ENTITY IS NOT A BANKING ENTITYAND IS NOT SUBJECT

TO THE VOLCKER RULE

Entity is a banking entity. Go to next page.

Does the IDI function solely in a trust or fiduciary capacity (a non-depository trust company) and is not affiliated with an IDI (other than an excluded small bank or non-depository trust company)?

Substantially all of its deposits are in trust funds and are received in a bona fide fiduciary capacity

None of its insured deposits are offered or marketed by or through an affiliate of the institution

The IDI does not: Accept demand deposits or deposits that can be withdrawn by check or similar

means for payment to third parties or others, or make commercial loans Obtain payment or payment-related services from any Federal Reserve Bank Exercise Federal Reserve discount or borrowing privileges

Is the affiliate or subsidiary:

A covered fund that is not itself a banking entity under any of the previous questions?

A portfolio company held under the merchant banking or insurance company investment authorities of section 4(k) of the BHC Act, or any portfolio concern controlled by an SBIC, in each case, that is not itself a banking entity under any of the previous questions?

The FDIC acting in its corporate capacity or as conservator or receiver?

YES

NO

NO

YES

YES

YES

Is the entity:


YES

An insured depository institution (IDI) excluded from the application of the Volcker Rule because it is relatively small and engaged in relatively limited trading activities (an excluded small bank)?

An IDI is an excluded small bank if it, and every company that controls it, has: • Total consolidated assets of $10 billion or less; and • Trading assets and liabilities (TAL), on a

consolidated basis, that are less than 5% of its total consolidated assets.

NO

YES

YES

NO





Step 1B:Does the Activity or Transaction Involve a

Purchase or Sale by the Banking Entity of One or More Financial Instruments?

Trade is a purchase or sale

of a financial instrument.

Go to next page.

YES

NO

3



Loan

Any loan, lease, extension of credit, or secured or unsecured receivable that is

not a security or derivative

Commodity

A commodity, except one that is:

• An excluded commodity (i.e., financial commodities), other than foreign exchange or currency

• A futures contract or option on a futures contract

• A derivative

Foreign exchange orcurrency

SecuritiesAs defined in section 3(a)(10) of the Securities Exchange Act including

an option on a security

Derivatives Includes:• Swaps and security-based swaps• Physical commodity forwards• Foreign exchange swaps and foreign exchange forwards• Retail foreign exchange and retail commodity transactions• An option on any of the above Does not include: • Any consumer, commercial or other agreement, contract or transaction that has been

jointly determined by the SEC and CFTC not to be a swap or security-based swap• Any identified banking product under the Legal Certainty for Banking Products Act

of 2000

Futures contracts and options on futures contracts

* For derivatives, “purchase” and “sale” include the execution, termination (prior to scheduled maturity), assignment, exchange or similar transfer/conveyance of, or extinguishing of rights or obligations under, a derivative.

INCLUDED IN THE DEFINITION OF FINANCIAL INSTRUMENT:SECURITIES, DERIVATIVES, FUTURES

EXCLUDED FROM THE DEFINITION OF FINANCIAL INSTRUMENT

© 2020 Davis Polk & Wardwell LLP. All rights reserved. This presentation is not a full analysis of the matters presented and should not be relied upon as legal advice. volckerrule.com 3

VOLCKER RULE 2.0 – PROP

YESNO

Is the banking entity purchasing or

selling* as principalone or more of the

following?







Step 1C:Is the Banking Entity Trading as Principal

for a Trading Account?

Regardless of purpose, does the banking entity meet either of the following descriptions?

The banking entity is licensed or registered to engage in the business of a dealer, a swap dealer, or a security-based swap dealer (or required to be).

The banking entity engages in the business of a dealer, swap dealer or security-based swap dealer outside of the United States.

AND

The financial instrument is purchased or sold in connection with the activities that require the banking entity to be licensed/registered as a dealer or are in connection with the activities of such business outside the United States, as relevant.



DEALER TEST

Entity is trading as principal for a trading

account. Go to the next page.

*Account does not refer to an account in the normal business or accounting sense. The preamble notes that trading account is nomenclature for the set of transactions that are subject to the restrictions on proprietary trading.


YES TO ANY APPLICABLE TESTNO TO ALL APPLICABLE TESTS

Is the banking entity, or any affiliate of the banking entity, an insured depository institution, a bank holding company or a savings and loan company that calculates risk-based capital ratios under the U.S. banking agencies’ market risk capital rule?

OR

If the banking entity does not calculate risk-based capital ratios under the U.S. market risk capital rule, has the banking entity made an election to assess its trading account as if it were subject to the U.S. market risk capital rule?

A banking entity must apply this election consistently across itself and all of its wholly-owned subsidiaries.

Is the account* used to purchase or sell one or more financial instruments principally for the purpose of any of the following?

Short-term resale Benefitting from actual or expected short-

term price movements Realizing short-term arbitrage profits Hedging one or more such positions

A purchase or sale of a financial instrument will be presumed not to be for a trading account if the banking entity: holds the instrument for 60 days or

longer, and does not substantially transfer its risk

within 60 days.

SHORT-TERM INTENT TEST

MARKET RISK CAPITAL (MRC) TEST

*See slide 6 for further details.

**If a banking entity is or elects to be subject to the MRC Test, then it is not subject to the Short-Term Intent Test.

NO**

Is the account used to purchase or sell financial instruments that are both covered positions and trading positions (or hedges of such covered positions) under the U.S. market risk capital rule?

YES

Arethe following

tests satisfied?





Step 1D-1:Is an Exclusion from Proprietary Trading Available?

Does thepurchase or sale meet any of the

following criteria?

ACTIVITY IS NOT PROPRIETARY

TRADING AND IS NOT WITHIN THE SCOPE OF THE VOLCKER RULE

Go to the next page.

Securities lending transaction in which the banking entity lends or borrows a security temporarily to or from another party pursuant to a written securities lending agreement under which the lender retains the economic interests of an owner of such security, and has the right to terminate the transaction and to recall the loaned security on terms agreed by the parties.

Purchase or sale of a security, deliverable foreign exchange forward, deliverable foreign exchange swap or cross-currency swap for the purpose of liquidity management in accordance with a documented liquidity management plan of the banking entity.

Made by a banking entity to satisfy: an existing delivery obligation of the banking entity or its customers, including to

prevent or close out a failure to deliver. an obligation of the banking entity in connection with a judicial, administrative, self-

regulatory organization or arbitration proceeding.

Made by a banking entity that is a member of a clearing agency, derivatives clearing organization or designated financial market utility, in specified circumstances.

SECURITIES LENDING

Made by a banking entity that is a derivatives clearing organization or a clearing agency in connection with clearing financial instruments.

REPO AND REVERSE REPO

LIQUIDITY MANAGEMENT PLAN

DCO/CLEARING AGENCY TRANSACTIONS

LIMITED CLEARING MEMBER ACTIVITIES

SATISFY AN EXISTING DELIVERY OR LEGAL OBLIGATION

Repo or reverse repo pursuant to which the banking entity has simultaneously agreed, in writing, to both purchase and sell a stated asset, at a stated price and on stated dates or on demand with the same counterparty.

Is the banking entity trading in accordance with a documented liquidity management plan that meets specified requirements?

These circumstances include any purchase or sale:

necessary to correct trading errors made by or on behalf of a customer;

in connection with and related to the management of a default or threatened imminent default of a customer;

in connection with and related to the management of a default or threatened default of the clearinghouse or financial market utility;

in connection with and related to the management of a default or threatened default of another member of the clearinghouse or financial market utility; or

required by the rules of the clearinghouse or financial market utility to mitigate the risk resulting from the clearing by a member of security-based swaps that reference the member or an affiliate of the member.

NO TO ALL QUESTIONS

YES TO ANY QUESTION






Step 1D-2:Is an Exclusion from Proprietary Trading Available?

Does thepurchase or sale meet any of the

following criteria?

ACTIVITY IS NOT PROPRIETARY

TRADING AND IS NOT WITHIN THE SCOPE OF THE VOLCKER RULE

The trading activity is

proprietary trading within the

scope of the Volcker Rule. Go

to Step 2.

Made by the banking entity acting solely as agent, broker or custodian.

Made through a deferred compensation, stock-bonus, profit-sharing or pension plan of the banking entity that is established in accordance with the law of the United States or a foreign sovereign, if the purchase or sale is made directly or indirectly by the banking entity as trustee for the benefit of persons who are or were employees of the banking entity.

Made in the ordinary course of collecting a debt previously contracted in good faith, provided that the banking entity divests the financial instrument as soon as practicable, and does not retain such investment for longer than the period permitted by its primary regulatory agency.

YES TO ANY QUESTION

NO TO ALL QUESTIONS

ACTING AS AGENT, BROKER OR CUSTODIAN

EMPLOYEE COMPENSATION PLANS

DEBT PREVIOUSLY CONTRACTED


Made in error by a banking entity in the course of conducting a permitted or excluded activity or a subsequent transaction to correct such an error.

ERROR TRADES

Made by the banking entity contemporaneously with also entering into a customer-driven swap or security-based swap and a matched swap or security-based swap if: • The banking entity retains no more than minimal price risk; and • The banking entity is not a registered broker-dealer, swap dealer or security-based swap

dealer.

MATCHED, CUSTOMER-DRIVEN DERIVATIVE TRANSACTIONS

Used by the banking entity to hedge mortgage servicing rights or mortgage servicing assets in accordance with a documented hedging strategy.

HEDGES OF MORTGAGE SERVICING RIGHTS OR ASSETS

Is the purchase or sale of a financial instrument that does not meet the definition of trading asset or trading liability under the applicable reporting form for the banking entity as of January 1, 2020.

NON-TRADING ASSETS OR LIABILITIES





Step 2A-1: Permitted Activities: Market Making

Are the compensation arrangements of

persons performing the market making-related activities designed not to reward or incentivize prohibited proprietary

trading?

Is the trading desk’s market making-related activities designed not to exceed, on an ongoing basis, the reasonably expected near term demands (RENTD) of clients, customers or counterparties?**

A trading desk is presumed to be in compliance with this RENTD requirement if it establishes, implements, maintains and enforces internal limits that are designed not to exceed the RENTD of clients, customers or counterparties, as discussed in slide 9.

Is the activity market making-

related?

YES TO BOTH

NO TO EITHER

NO

DOES THE RELEVANT TRADING DESK* ROUTINELY STAND READY, AND IS IT WILLING AND AVAILABLE?

Routinely stand ready

Does the trading desk that establishes and manages the financial exposure routinely stand ready to purchase and sell financial instruments

related to its financial exposure?

Financial exposure means the aggregate risks of one or more financial instruments and any associated loans, commodities, or foreign

exchange or currency, held by a banking entity or its affiliate and managed by a particular trading

desk as part of the trading desk’s market making-related activities.

Willing and available

Is the trading desk willing and available to quote, purchase and sell, or otherwise enter into long and short positions in those types of financial instruments for its own account in commercially reasonable amounts and throughout market cycles on a basis appropriate for the liquidity, maturity and depth of the market for the relevant types of financial instruments?

REASONABLY EXPECTED NEAR TERM DEMANDS OF CLIENTS, CUSTOMERS OR COUNTERPARTIES

Market making-related hedging conducted or directed by the same market-making trading desk does not need

to separately comply with the risk-mitigating hedging permitted activity. Instead, market making-related hedging may be addressed by the market-making

compliance program and controls.

AND

YES

ACTIVITY IS NOT A PERMITTED MARKET MAKING-RELATED ACTIVITY

YESNO


NO

* See slide 10 for further details.

** See slide 9 for further details.

Significant or Moderate TAL Banking Entity: has the banking entity established, and does it implement,

maintain, and enforce, an internal compliance program that is reasonably designed to ensure compliance (including specific market making compliance

program requirements for Significant TAL Banking Entities)?

YES

Is the banking entity licensed or registered

to engage in market-making activity in accordance with applicable law?

ACTIVITY IS NOT A PERMITTED MARKET MAKING-RELATED ACTIVITY

NO NO

YES

Metrics required for a Significant TAL Banking

Entity

Activity may be a permitted underwriting activity. Go to Step 3.





Step 2A-2:Permitted Activities: Underwriting

Are the amount and type of the securities in the trading desk’s underwriting position designed not to exceed the RENTD of clients, customers or

counterparties***, taking into account the liquidity, maturity and depth of the market for the relevant

types of securities?

A trading desk is presumed to be in compliance with this RENTD requirement if it establishes,

implements, maintains and enforces internal limits that are designed not to exceed the RENTD of

clients, customers or counterparties, as discussed in slide 9.

Are the compensation arrangements of persons

performing the underwriting activities designed not to reward

or incentivize prohibited proprietary trading?

ACTIVITY IS NOT A PERMITTED UNDERWRITING ACTIVITY

Is the banking entity licensed or registered to engage in the underwriting

activities in accordance with applicable law?

NO

YES

Significant or Moderate TAL Banking Entity: has the banking entity established, and does it implement, maintain, and enforce, an internal

compliance program that is reasonably designed to ensure compliance (including specific market making

compliance program requirements for Significant TAL Banking Entities)?

YES

Are reasonable efforts made to sell or otherwise reduce the underwriting

position within a reasonable period, taking into account the liquidity, maturity and depth of the market for the relevant

types of securities?

Is the banking entity acting as an underwriter for a distribution of securities and is the

underwriting position of the trading desk* related to this distribution?

Underwriter

• A person who has agreed with an issuer** or selling security holder to purchase securities, engage in a distribution of securities, or manage a distribution of securities on behalf of the issuer/selling security holder.

• A person who participates or agrees to participate in a distribution for or on behalf of the issuer/selling security holder.

Distribution

• An offering of securities, whether or not subject to registration under the Securities Act of 1933, that is distinguished from ordinary trading transactions by the presence of special selling efforts and selling methods, or

• An offering of securities made pursuant to an effective registration statement under the Securities Act of 1933.

Underwriting position

The long or short positions in one or more securities held by a banking entity or its affiliate, and managed by a particular trading desk, in connection with a particular distribution of securities for which such banking entity or affiliate is acting as an underwriter.

** Issuer is defined as in Section 2(a)(4) of the Securities Act of 1933.

YES

NO

NO


Metrics required for a Significant TAL Banking

Entity

NO

NO

YES

YES

Is the activity underwriting?

*** See slide 9 for further details.

Activity may be a permitted underwriting activity. Go to Step 3.

YES* See slide 10 for further details.





Step 2A-3: Permitted Activities: Market Making and Underwriting

Key Terms and Concepts

CLIENT, CUSTOMER OR COUNTERPARTY

For the market making-related permitted activity, client, customer or counterparty refers to market participants that make use of the banking entity’s market making-related services by obtaining such services, responding to quotations, or entering into a continuing relationship with respect to such services.

A trading desk may engage in interdealer trading to meet the RENTD of its clients, customers or counterparties, including current demand, unwind or sell positions acquired from clients, customers or counterparties, or engage in risk-mitigating or inventory management transactions. However, a trading desk or other organizational unit of another banking entity is not a client, customer or counterparty of the trading desk if that other entity has trading assets and liabilities of $50 billion or more, unless:

• the trading desk documents how and why a particular trading desk or other organizational unit of the entity should be treated as a client, customer, or counterparty of the trading desk for purposes of market making-related permitted activity; or

• the purchase or sale by the trading desk is conducted anonymously on an exchange or similar trading facility that permits trading on behalf of a broad range of market participants.

Banking entities are not permitted to treat affiliated trading desks as clients, customers or counterparties, but certain transactions between affiliated trading desks may still be permitted as market making-related permitted activity if they do not require the expansion of the trading desks’ market-making limits.

For the underwriting permitted activity, client, customer or counterparty refers to market participants that may transact with the banking entity in connection with a particular distribution for which the banking entity is acting as underwriter.

INTERDEALERTRADING


PRESUMPTION OF COMPLIANCE

A market making trading desk is presumed to comply with the requirement that its market-making related activities are designed not to exceed, on an ongoing basis, RENTD if it establishes, implements, maintains and enforces internal limits that are designed not to exceed RENTD, based on the nature and amount of the trading desk’s market-making related activities, on the:

• amount, types and risks of its market-maker positions;• amount, types and risks of the products, instruments and exposures the trading desk may use for risk management purposes;• level of exposures to relevant risk factors arising from its financial exposure; and• period of time a financial instrument may be held.

An underwriting trading desk is presumed to comply with the requirement that its market-making related activities are designed not to exceed RENTD if it establishes, implements, maintains and enforces internal limits that are designed not to exceed RENTD, based on the nature and amount of the trading desk’s underwriting activities, on the:

• amount, types and risk of its underwriting position;• level of exposures to relevant risk factors arising from its underwriting position; and• period of time a security may be held.

Banking entities will be required to maintain records regarding any limit that is exceeded and any temporary or permanent increase to any limits and make those records available to Agencies upon request.

The presumption of compliance will continue to be available if an internal risk limit is exceeded or if the banking entity increases an internal risk limit if the banking entity takes action as promptly as possible after the breach to bring the trading desk into compliance and follows established written authorization procedures, including escalation procedures.

An Agency may rebut the presumption of compliance it determines, taking into account the liquidity, maturity, and depth of the market for the relevant types of financial instruments and based on all relevant facts and circumstances, that a trading desk is engaging in activity that is not based on the trading desk’s RENTD.





A unit of organization of a banking entity that purchases and sells financial instruments for the trading account of the banking entity or an affiliate that is:

• Structured by the banking entity to implement a well-defined business strategy; organized to ensure appropriate setting, monitoring and management review of the desk’s trading and hedging limits, current and potential future loss exposures and strategies; and characterized by a clearly-defined unit that typically:

• engages in coordinated trading activity with a unified approach to its key elements;• operates subject to a common and calibrated set of risk metrics, risk levels and joint trading limits;• submits compliance reports and other information as a unit for monitoring by management; and • books its trades together.

• Or, for a banking entity that calculates risk-based capital ratios under the U.S. market risk capital rule, or a consolidated affiliate for regulatory reporting purposes of a banking entity that calculates risk-based capital ratios under the U.S. market risk capital rule, established by the banking entity or its affiliate for purposes of market risk capital calculations under the U.S. market risk capital rule.

TRADING DESK


Step 2A-3: Permitted Activities: Market Making and Underwriting

Key Terms and Concepts





RELATIONSHIP TO RISKS

Risk-mitigating hedging activities are permitted if conducted in connection with and related to individual or aggregated positions, contracts or other holdings of the banking entity and if designed to reduce the specific risks to the banking entity in connection with and related to such positions, contracts or other holdings.

Is the hedging activity designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks arising in connection with and related to identified positions, contracts or other holdings of the banking entity, based upon the facts and circumstances of the identified underlying and hedging positions, contracts or other holdings and the risks and liquidity of these positions?

The specific, identified risks may include, among others:

Market risk Counterparty or credit risk Currency or foreign exchange risk Interest rate risk Commodity price risk Basis risk Any similar risks

This requirement must be met both at the inception of the hedging activity and when any adjustments are made.

SIGNIFICANT TAL BANKING ENTITIES: IS THE HEDGING ACTIVITY SUBJECT TO ADDITIONAL DOCUMENTATION REQUIREMENTS

Additional documentation is required for any purchase or sale of a financial instrument by a Significant TAL Banking Entity made in reliance on this permitted activity if the purchase or sale:

Is not established by the specific trading desk establishing or responsible for the underlying positions, contracts, or other holdings the risk of which the hedging activity is designed to reduce;

Is established by the specific trading desk establishing or responsible for the underlying positions, contracts, or other holdings the risks of which the purchases or sales are designed to reduce, but is effected through a financial instrument, exposure, technique or strategy that is not specifically identified in the trading desk’s specific risk mitigating hedging policies and procedures; or

Is established to hedge aggregated positions across two or more trading desks;

Unless the hedging activities involve instruments on a pre-approved list and subject to pre-approved limits appropriate for the particular common hedging activity.

Step 2B:Permitted Activities: Risk-Mitigating Hedging

Is the activity hedging?

Activity may be a permitted risk-

mitigating hedging activity. Go to Step 3.

Additional documentation

required.

YES

OTHER BANKING ENTITIES

Is the hedging activity by the banking entity subject to ongoing recalibration to ensure that the hedging activity remains designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks and is not prohibited proprietary trading?

SIGNIFICANT TAL BANK ENTITIES

At the inception of the hedge, does it not give rise to significant new or additional risk that is not itself hedged contemporaneously?

Is the purchase or sale subject to continuing review, monitoring and management by the entity?

The review, monitoring and management must:

Be consistent with written hedging policies and procedures as required by the final regulations.

Be designed to reduce or otherwise significantly mitigate specific, identifiable risks that develop over time from the hedging activities undertaken in reliance on this permitted activity and the underlying positions, contracts and other holdings of the banking entity, based upon the relevant facts and circumstances.

Require ongoing recalibration of the hedging activity by the banking entity to ensure that the hedging activity remains designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks and is not prohibited proprietary trading.

Are the compensation arrangements of persons performing the hedging activity designed not to reward or incentivize proprietary risk-taking?


YES TO ALL

YES

YES NO

ACTIVITY IS NOT A PERMITTED RISK-MITIGATING HEDGING ACTIVITY

NO

NO

Significant or Moderate TAL Banking Entity: has the banking entity established,

and does it implement, maintain, and enforce, an internal compliance program that is

reasonably designed to ensure compliance (including specific risk-mitigating hedging

compliance program requirements for Significant TAL Banking Entities)? Certain metrics required

for a Significant TAL Banking Entity.





Step 2C:Permitted Activities:

U.S. Government, Agency and Municipal Obligations

Is the trading in permitted domestic

government obligations?

Is the financial instrument an obligation, participation or other

instrument of, or issued or guaranteed by, an agency of the United States, Ginnie Mae, Fannie

Mae, Freddie Mac, a Federal Home Loan Bank, Farmer Mac or a Farm Credit System institution

chartered under and subject to the provisions of the Farm Credit Act

of 1971?

Is the financial instrument an obligation of, or

issued or guaranteed by, the United States?

Is the financial instrument an

obligation of any State or any

political subdivision of a

State, including any municipal security?

Is the financial instrument an obligation of the FDIC, or any

entity formed by or on behalf of the FDIC for purpose of facilitating the disposal of assets acquired or held

by the FDIC in its corporate capacity or as conservator or

receiver under the Federal Deposit Insurance Act or its Dodd-Frank Act Orderly Liquidation Authority?

NO NONO

ACTIVITY IS NOT A

PERMITTEDDOMESTIC

GOVERNMENT OBLIGATIONS

ACTIVITY

NO

YES YES YES

Activity may be a permitted domestic government obligations activity. Go to Step 3.



and does it implement, maintain, and enforce, an internal compliance program that is

reasonably designed to ensure compliance?

YES

NO

YES

Certain metrics required for a Significant TAL Banking

Entity.





Step 2D:Permitted Activities:

Foreign Government Obligations

ACTIVITY IS NOT A

PERMITTEDFOREIGN

GOVERNMENT OBLIGATIONS

ACTIVITY

Is the banking entity a foreign entity

owned or controlled by a banking entity organized or

established under the laws of the

United States or any State?

Is the financial instrument owned by the foreign

entity and not financed by an affiliate that is located in the United States or organized

under the laws of the United States or any

State?

Is the banking entity organized under, or directly or indirectly

controlled by, a banking entity that is organized under the laws of a

foreign sovereign, and not directly or indirectly controlled by a top-

tier banking entity organized under the laws of the United States?

Is the purchase or sale as principal

being made by an insured

depository institution?

Is the financial instrument traded an obligation of, or issued or

guaranteed by, the foreign sovereign under the laws of which the foreign banking entity is organized (including any multinational central bank of

which the foreign sovereign is a member) or any agency or political

subdivision of that foreign sovereign?

NOYES

NO

Is the trading in permitted foreign


Activity may be a permittedforeign government obligations activity.

Go to Step 3.

YES

YES

NO

YESNO

U.S. AFFILIATES OF FOREIGN BANKING

ENTITIES(AND FOREIGN BANKING

ENTITIES)

Is the trading in permitted foreign


FOREIGN AFFILIATES OF A U.S. BANKING ENTITY

(BUT NOT FOREIGN BRANCHES OF U.S. BANKING ENTITIES)

YES YES

Is the banking entity a foreign bank, as

defined in the Federal Reserve Board’s Regulation K, or regulated as a

securities dealer by the foreign sovereign under whose laws the entity is organized?

Is the banking entity purchasing or selling a financial instrument that is an

obligation of, or issued or guaranteed by, the foreign sovereign under whose laws the foreign bank is

organized (including any multinational central bank of which the foreign

sovereign is a member) or any agency or political subdivision of that foreign

sovereign?

YES NO


NO

NONO


and does it implement, maintain, and enforce, an internal compliance program that is reasonably

designed to ensure compliance?

YES

Certain metrics required for a Significant TAL

Banking Entity.





Step 2E:Permitted Activities: On Behalf of Customers


FIDUCIARY CAPACITY

Does the banking entity’s purchase or sale of financial instruments meet the

following requirements:

The banking entity is acting as trustee, or in a similar fiduciary capacity for a customer;

The transaction is conducted for the account of, or on behalf of, a customer; and

The banking entity does not have or retain beneficial ownership of the financial instruments.

NO

OR

Activity may be a permitted activity on behalf of customers.

Go to Step 3.

Is thepurchaseor sale a

permitted activity on behalf of customers?

ACTIVITY IS NOT A PERMITTED ACTIVITY ON BEHALF OF

CUSTOMERS

YESYES TO ALL

NO TO ANY

ACTIVITY IS NOT A PERMITTED ACTIVITY ON BEHALF OF

CUSTOMERS

YES


and does it implement, maintain, and enforce, an internal compliance program that is reasonably


RISKLESS PRINCIPAL

Is the banking entity acting as riskless principal in a transaction in which the banking entity, after receiving an order to purchase or sell a financial instrument from a customer, purchases or sells the financial instrument for its own account to offset a contemporaneous purchase or sale to or from the customer?

Metrics not required.

NO





Step 2F:Permitted Activities: Regulated Insurance Companies

Is the purchase or sale conducted in compliance with, and subject to, the

applicable insurance company investment laws, regulations and written guidance of the State or jurisdiction in which the insurance company is

domiciled?

YESYESYES

Is the activity permitted by or for

a regulated insurance company?

YESNO

ACTIVITY IS NOT A PERMITTED ACTIVITY BY A REGULATED

INSURANCE COMPANY

Activity may be a permitted activity

by a regulated insurance

company. Go to Step 3.

NO

YES

NO


NO

Is the insurance company or affiliate purchasing or selling financial instruments solely

for the general account of the insurance company or a

separate account established by the insurance company?

Have the appropriate federal banking agencies, after consultation with the

Financial Stability Oversight Council and the relevant insurance commissioner, jointly determined that a particular

insurance legal requirement is insufficient to protect the safety and soundness of the

banking entity or the financial stability of the United States?


Significant or Moderate TAL Banking Entity:

has the banking entity established, and does it implement, maintain,

and enforce, an internal compliance program that is reasonably


Is the banking entity an insurance company, or an

affiliate of an insurance company?

NO





NONO

Step 2G:Permitted Activities: Trading Activities of

Foreign Banking Entities Outside the United States


ACTIVITY IS NOT A PERMITTED FOREIGN

BANK ACTIVITY

CHARACTERISTICS OF THE FOREIGN BANKING ENTITY

Is the entity organized, or directly or indirectly controlled by a banking entity that is organized, under

the laws of the United States or of any State?

U.S. INVOLVEMENT OF THE FOREIGN BANKING ENTITY

Is the banking entity purchasing or selling as principal (including relevant personnel) located in the United States?

A U.S. branch, agency or subsidiary of a foreign banking entity is considered to be located in the United States.

However, the foreign bank that operates or controls such a branch, agency or subsidiary is not considered to be located in the United States solely by virtue of operating or controlling the U.S. branch, agency or subsidiary.

YES

YES

Is the activity permitted for

foreign banking entities?

FOREIGN BANKING ORGANIZATIONS (FBOS)

For a banking entity that is an FBO for purposes of the Federal Reserve Board’s Regulation K, does the entity meet the qualifying foreign banking organization requirements of Regulation K?

OTHER FOREIGN ORGANIZATIONS

For a banking entity that is not an FBO for purposes of Regulation K, does the entity meet at least two of the following three requirements?

Total assets held outside the United States exceed total assets held in the United States.

Total revenues derived from business outside the United States exceed total revenues derived from business in the United States.

Total net income derived from business outside the United States exceeds total net income derived from business in the United States.

DECISION-MAKING PERSONNEL

Are relevant personnel who make the decision to purchase or sell as principal for the banking entity

located in the United States?

TRANSACTION ACCOUNTING

Is the purchase or sale, including any transaction arising from risk-mitigating hedging related to the instruments

purchased or sold, accounted for as principal directly or on a consolidated basis by any branch or affiliate

that is located in the United States or organized under United States or State laws?


NO

YES

YES

NO

Activity may be a permitted foreign banking

activity. Go to Step 3.

NO


Significant or Moderate TAL Banking Entity:

has the banking entity established, and does it implement, maintain

and enforce, an internal compliance program that is


YES

YES





Step 2H:Permitted Activities: Qualifying Foreign Excluded Funds


ACTIVITY IS NOT A PERMITTED ACTIVITY BY A QUALIFYING FOREIGN

EXCLUDED FUND

Would the entity be a covered fund if it were organized or established in the U.S.?

-or-

Is the entity, or does it hold itself out as being, an entity that raises money from investors primarily for the purpose of

investing in financial instruments for resale or other disposition or otherwise trading in

financial instruments?

Is the banking entity with which the entity has a relationship not organized in the U.S.

or directly or indirectly controlled by a banking entity organized in the U.S.?

and

Does that banking entity’s ownership interest or sponsorship of the entity meet the requirements for permitted covered fund activities and investments solely

outside the U.S. under the Volcker Rule covered fund provisions?

SEE DAVIS POLK COVERED FUNDS FLOWCHARTS, SLIDE 39 FOR THE

REQUIREMENTS OF SOLELY OUTSIDE THE U.S.

*A qualifying foreign excluded fund is not itself

subject to the Volcker Rule compliance program requirements that are

otherwise applicable to a banking entity

Are the ownership interests offered and sold solely outside the U.S.?

YES

YES

Is the entity organized or established outside the U.S.?

YES

Is the entity not operated in a manner that enables the banking entity that sponsors or controls it, or any of its affiliates, to evade

the requirements of the Volcker Rule?

Is the entity established as part of a bona fide asset management business?

YES

Would the entity not otherwise be a banking entity except by virtue of a

relationship with another banking entity (whether ownership, sponsorship, or other

relationship)?

YES

YES

NO

NO

NO

NO

NO

NOYES

NO

Activity may be a permitted qualifying

foreign excluded fund activity. Go to Step 3.


For a Significant or Moderate TAL Banking Entity that sponsors or controls a

Qualifying Foreign Excluded Fund*: has the banking entity

established, and does it implement, maintain

and enforce, an internal compliance program that is


YES

Is the activity permitted by a

qualifying foreign excluded fund?





Step 3:Is the Activity Precluded by a Backstop Prohibition?

MATERIAL CONFLICTS OF INTEREST

Would the transaction, class of transactions, or activity involve or result in the banking entity’s interests being materially

adverse to the interests of its client, customer, or counterparty with respect to such transaction, class of transactions or

activity?

ACTIVITY IS PERMITTED

NO

NO

MATERIAL HIGH-RISK EXPOSURES

Would the transaction, class of transactions or activity result, directly or indirectly, in a material exposure by the covered banking entity to a high-risk asset or a high-

risk trading strategy?

High-risk trading strategy means a trading strategy that would, if engaged in by a banking entity, significantly increase the likelihood that the banking entity would incur a substantial financial loss or would pose a threat to the financial stability of the United States.

ACTIVITY IS PROHIBITED PROPRIETARY TRADING EVEN IF IT WOULD OTHERWISE

QUALIFY AS A PERMITTED ACTIVITY

EXCEPTION 1TIMELY AND EFFECTIVE DISCLOSURE

Before effecting the specific transaction or class or type of transactions, or engaging in the specific activity, has the banking entity:

Made clear, timely and effective disclosure of the conflict of interest, together with other necessary information, in reasonable detail and in a manner sufficient to permit a reasonable client, customer or counterparty to meaningfully understand the conflict of interest; and

Made such disclosure in a manner that provides the client, customer or counterparty the opportunity to negate, or substantially mitigate, any materially adverse effect on such party created by the conflict of interest?

EXCEPTION 2INFORMATION BARRIERS

Has the banking entity established, maintained and enforced information barriers that are memorialized in written policies and procedures, such as physical separation of personnel, or functions, or limitations on types of activity, that are reasonably designed, taking into consideration the nature of the banking entity’s business, to prevent the conflict of interest from involving or resulting in a materially adverse effect on a client, customer or counterparty?

The banking entity may not rely on information barriers if it knows or reasonably should know that notwithstanding, the conflict of interest may involve or result in a materially adverse effect on a client, customer, or counterparty.

YES

THREAT TO SAFETY AND SOUNDNESS

Would the transaction, class of transactions or activity pose a threat to the safety and soundness of the banking entity or the financial stability of the United States?

Would the activity

otherwise be precluded?

Does either one of the following remedial measures apply?

NO

NO


NO

YES

YES

YESYES NO

MATERIAL HIGH-RISK EXPOSURES

Would the transaction, class of transactions or activity result, directly or indirectly, in a material exposure by the covered banking entity to a high-risk asset or a high-

risk trading strategy?

High-risk trading strategy means a trading strategy that would, if engaged in by a banking entity, significantly increase the likelihood that the banking entity would incur a substantial financial loss or would pose a threat to the financial stability of the United States.

High-risk asset means an asset or group of related assets that would, if held by a banking entity, significantly increase the likelihood that the banking entity would incur a substantial financial loss or would pose a threat to the financial stability of the United States.





Prop Trading Compliance RequirementsTable of Contents

The Volcker Rule includes compliance program requirements that vary depending upon whether a banking entity (together with its affiliates) is a Significant TAL Banking Entity, a Moderate TAL Banking Entity or a Limited TAL Banking Entity.

Significant TAL Banking Entities are also subject to metrics reporting requirements. This section of the document outlines the Volcker Rule’s most important compliance-related provisions, with a focus on those applicable to Significant TAL Banking Entities.


THE 3 TIERS 20

TIERED COMPLIANCE PROGRAM 21

SIX PILLAR COMPLIANCE PROGRAM 22

SUMMARY OF PROPRIETARY TRADING METRICS 23

PERMITTED ACTIVITY-SPECIFIC COMPLIANCE PROGRAM ELEMENTS 25

DAVIS POLK CONTACTS 26






Which Compliance Tier Applies?

For a given quarter, Trading Assets and

Liabilities (TAL)


= minus

Obligations of, or guaranteed by, the United States federal government or any agency of the United States (e.g., GSEs).

Significant TAL Banking Entity

TAL = $20 billion or more

Moderate TAL Banking Entity

TAL = at least $1 billion but less than $20 billion

Limited TAL Banking Entity

TAL = less than $1 billion

Based on the four-quarter rolling average of the consolidated gross TAL of the banking entity, its affiliates and its

subsidiaries, what is the banking entity’s applicable compliance tier?

Do not subtract obligations of U.S. state or local government entities, including municipal securities.

Consolidated gross TAL of the banking entity, its affiliates and its subsidiaries

For an FBO or a subsidiary of an FBO, trading assets and liabilities are measured based on the combined U.S. operations of the top-tier FBO.

For additional detail on compliance requirements for each tier, see next slide.





TIERED COMPLIANCE REQUIREMENTS BASED ON TAL


SIGNIFICANT TAL BANKING ENTITIES

Significant TAL Banking Entities are subject to six-pillar, Volcker-specific compliance program requirements, including a CEO attestation requirement and metrics reporting requirements.

MODERATE TAL BANKING ENTITIES

Moderate TAL Banking Entities may satisfy their Volcker Rule compliance program obligations by including in their existing compliance policies and procedures appropriate references to the requirements of Section 13 of the BHC Act, and the Volcker Rule regulations, with adjustments as appropriate depending upon their activities, size, scope and complexity.

No CEO attestation or metrics requirements apply.

LIMITED TAL BANKING ENTITIES

Limited TAL Banking Entities do not have an ongoing obligation to demonstrate compliance with the Volcker Rule.

Instead, Limited TAL Banking Entities are presumed to be compliant with the Volcker Rule unless the Agencies rebut the presumption of compliance by determining through examination or audit that the banking entity has engaged in activities that are otherwise prohibited by the Volcker Rule.

The Agencies may rebut the presumption of compliance only in accordance with prescribed notice and response procedures.

If the presumption of compliance is rebutted, the Agencies may require the banking entity to be treated as either a Moderate TAL Banking Entity or a Significant TAL Banking Entity.






INTERNAL POLICIES AND PROCEDURESWritten policies and procedures reasonably designed to document, describe, monitor and limit exempted trading activities conducted by the banking entity (including setting, monitoring and managing limits required under the market making-related, underwriting and risk-mitigating hedging permitted activities) to ensure that all activities comply with the Volcker Rule.

A management framework that clearly delineates responsibility and accountability for compliance with the Volcker Rule and that includes appropriate management review of trading limits, strategies, hedging activities, investments, incentive compensation and other matters identified in the Volcker Rule or by management as requiring attention.

Independent testing and audit of the effectiveness of the compliance program conducted periodically by qualified personnel of the banking entity or by a qualified outside party.

Records sufficient to demonstrate compliance with the Volcker Rule, which a banking entity must promptly provide to Agencies upon request and retain for a period of no fewer than 5 years or such longer period as required by Agencies. This must include the specified records required to be maintained in connection with the additional document requests for risk-mitigating hedging permitted activity, as applicable.

Six Pillar Compliance Program

COMPLIANCE PROGRAMS FOR SIGNIFICANT TAL BANKING ENTITIES MUST, AT A MINIMUM, INCLUDE:

Training for trading personnel and managers, as well as other appropriate personnel, to effectively implement and enforce the compliance program.

MANAGEMENT FRAMEWORK—RESPONSIBILITY AND ACCOUNTABILITY

INDEPENDENT TESTING

TRAINING

RECORDKEEPING

A system of internal controls reasonably designed to monitor compliance and to prevent the occurrence of activities that are prohibited by the Volcker Rule.

INTERNAL CONTROLS

The terms, scope and detail of the compliance program must be appropriate for the types, size, scope and complexity of the activities and business structure of the banking entity.


CEO ATTESTATION

The CEO of a Significant TAL Banking Entity must, no later than March 31 of each year, attest in writing that the banking entity has in place processes to establish, maintain, enforce, review, test and modify the six-pillar compliance program in a manner reasonably designed to achieve compliance with Section 13 of the BHC Act and the Volcker Rule regulations.

For banking entities that are U.S. branches or agencies of foreign banking entities, the attestation may be provided by the senior management officer of the U.S. operations the foreign banking entity who is located in the United States.





Summary of Proprietary Trading Metrics for Significant TAL Banking Entities

Reported Frequency and Method

Record Retention

Level of Measurement

Within 30 days of each quarter end in accordance with the XML Schema specified and published on the Agency’s website

Five years

Each trading desk, as defined in Step 2A-3. This may span across legal entities

Risk Management

Source of Revenue

Customer-Facing Activity

Internal Limits and Usage

Value at Risk (VaR)

Comprehensive Profit and Loss Attribution

Positions

Transactions

Certain Reporting Remains Optional

Reporting Required: Metrics in respect of covered trading activities or a subset of covered trading activities, as explained above

Reporting Optional: Metrics in respect of trading conducted pursuant to an exclusion from the scope of proprietary trading, or pursuant to the on behalf of customers, regulated insurance company or foreign bank permitted activities

METRICS

KEY PROCEDURES AND LOGISTICS


These metrics must be reported for all desks engaged in underwriting, market making-related, risk-mitigating hedging and U.S./foreign government obligation permitted activities (covered trading activities)

These metrics must be reported for all desks engaged in covered trading activities

These metrics must be reported for all desks that rely on the underwriting and market making-related permitted activities to conduct underwriting or market making-related activity, respectively

Measurement Frequency

Daily





Summary of Proprietary Trading Metrics for Significant TAL Banking Entities

Narrative Statement

Record Retention

Level of Measurement

A banking entity may, but is not required to, provide as part of its quarterly reporting a narrative statement discussing any information the banking entity views as relevant for assessing the information it has reported.

Five years

Trading Desk Information

Provide identifying information about each trading desk and the desk’s associated metrics, including: name, identifier, identification of each type of covered trading activity in which the desk is engaged, a description of the desk’s general trading strategy, and a list identifying each Agency receiving the submission of the trading desk.

INFORMATIONAL REQUIREMENTS


Provide descriptive information about the desk’s reported quantitative metrics, including:

(1) an Internal Limits Information Schedule naming and describing each limit andidentifying the corresponding risk factor attribution if the limit type is a limit on a risk factor sensitivity and profit and loss attribution to the same risk factor is reported; and

(2) a Risk Factor Attribution Information Schedule providing identifying and descriptive information for each risk factor attribution reported pursuant to the Comprehensive Profit and Loss Attribution metric.





MARKET MAKING-RELATED

For its market making-related activities, a Significant TAL Banking Entity’s compliance program must address:

The financial instruments the trading desk stands ready to purchase and sell.

Risk management elements:• the actions the trading desk will take to demonstrably

reduce or otherwise significantly mitigate promptly the risks of its financial exposure (consistent with the limits set in the desk);

• the products, instruments, and exposures each trading desk may use for risk management purposes;

• the techniques and strategies each trading desk may use to manage the risks of the activities and positions; and

• the process, strategies, and personnel responsible for ensuring that the actions taken to mitigate these risks are and continue to be effective.

Limits for the trading desk in accordance with the market making-related presumption of compliance described on Step 2A-3.

Written authorization procedures, including escalation procedures that require review and approval of any trade that would exceed the trading desk’s limits, demonstrable analysis that the basis for any temporary or permanent increase to the trading desk’s limits, and independent review of such demonstrable analysis and approval. A significant TAL Banking Entity may comply with the written authorization procedures requirement by complying with the market making-related presumption of compliance described in Step 2A-3.

Internal controls and ongoing monitoring and analysis of the trading desk’s compliance with its limits.

COMPLIANCE PROGRAMS FOR SIGNIFICANT TAL BANKING ENTITIES MUST ADDRESS ELEMENTS SPECIFIC TO A BANKING ENTITY’S

MARKET MAKING-RELATED, UNDERWRITING AND RISK-MITIGATING HEDGING PERMITTED ACTIVITIES.

Permitted Activity-SpecificCompliance Program Elements

RISK-MITIGATING HEDGING – ADDITIONAL DOCUMENTATION REQUIREMENTS

Additional documentation is required for any purchase or sale of a financial instrument by a Significant TAL Banking Entity made in reliance on this permitted activity if the purchase or sale:

Is not established by the specific trading desk establishing or responsible for the underlying positions, contracts, or other holdings the risk of which the hedging activity is designed to reduce;

Is established by the specific trading desk establishing or responsible for the underlying positions, contracts, or other holdings the risks of which the purchases or sales are designed to reduce, but is effected through a financial instrument, exposure, technique or strategy that is not specifically identified in the trading desk’s specific risk mitigating hedging policies and procedures; or

Is established to hedge aggregated positions across two or more trading desks;

Unless the hedging activities are in instruments on a pre-approved list and subject to pre-approved limits appropriate for the particular common hedging activity.

RISK-MITIGATING HEDGING

For its risk-mitigating hedging activities, a Significant TAL Banking Entity’s compliance program must include:

Reasonably designed written policies and procedures regarding the positions, techniques and strategies that may be used for hedging, including documentation indicating what positions, contracts or other holdings a particular trading desk may use, and position and aging limits with respect to such positions, contracts or other holdings.

Internal controls and ongoing monitoring, management, and authorization and escalation procedures.

Analysis and independent testing designed to ensure that the positions, techniques and strategies that may be used for hedging may be reasonably expected to reduce or otherwise significantly mitigate the specific, identifiable risk(s) being hedged.

UNDERWRITING

For its underwriting activities, a banking entity’s compliance program must address:

The products, instruments or exposures each trading desk may purchase, sell, or manage as part of its underwriting activities.

Limits for each trading desk, in accordance with the underwriting presumption of compliance described in Step 2A-3.

Written authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk’s limits, demonstrable analysis of the basis for any temporary or permanent increase to a trading desk’s limits, and independent review of such demonstrable analysis and approval. A Significant TAL Banking Entity may comply with the written authorization procedures requirement by complying with the underwriting presumption of compliance described on Step 2A-3.

Internal controls and ongoing monitoring and analysis of each trading desk’s compliance with its limits.







Questions?If you have any questions regarding the matters covered in this publication, please

contact any of the lawyers listed below or your regular Davis Polk contact.

John Banes

Luigi L. De Ghenghi

Randall D. Guynn

Annette L. Nazareth

Gabriel D. Rosenberg

212 450 4116

212 450 4296

212 450 4239

202 962 7075

212 450 4537

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]

Margaret E. Tahyar

Christopher M. Paridon

212 450 4379

202 962 7135 [email protected]

Ryan Johansen 212 450 3408 [email protected]

Jai R. Massari 202 962 7062 [email protected]


Craig D. Kennedy 212 450 3231 [email protected]

[email protected]

mailto:[email protected]
























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